My Business Partner Is Taking a Salary I Never Agreed To — What Can I Do?
Discovering that your business partner has been paying themselves a salary — or increasing their own compensation — without your knowledge or agreement is a serious matter. It raises questions about self-dealing, breach of fiduciary duty, and potentially the misappropriation of business funds. This post identifies the issues that typically arise in this situation and the approaches business owners and their counsel generally consider.
Why Unauthorized Compensation Is a Legal Issue
In a closely held business, the owners typically owe each other fiduciary duties — duties of loyalty and care that require them to act in the best interests of the business and not to use their position to benefit themselves at the expense of their co-owners. A partner or member who pays themselves compensation that was not authorized by the governing documents or agreed to by the other owners may be breaching those duties.
Under New Jersey and New York law, the specific duties owed in a closely held LLC or partnership depend on the governing documents and the applicable statutes. Whether a particular compensation arrangement constitutes a breach depends on the facts — including what the operating agreement says about compensation, what the parties agreed to historically, and whether the compensation was disclosed and ratified.
Review the Operating Agreement
The operating agreement or partnership agreement is the starting point. It may address compensation directly — establishing who is entitled to a salary, what approval is required for compensation changes, and what restrictions apply to self-dealing transactions. If the agreement requires consent of all members or a majority vote to establish or modify compensation, a partner who has set their own salary without that approval may have a claim to answer.
If the agreement is silent on compensation, the analysis shifts to applicable statutory defaults and the parties’ course of dealing. A partner who has historically been paid a salary without objection is in a different position than one who has unilaterally started paying themselves for the first time.
Documenting the Situation
Before taking any action, it is generally advisable to gather documentation — bank statements, payroll records, tax filings, and any written communications about compensation. Understanding the full scope of what has been paid and over what period is important for evaluating the situation and for any future legal proceeding.
Approaches Practitioners Consider
Depending on the specific facts and the state of the business relationship, practitioners in this area typically consider a range of approaches. These include formal demand letters requiring disgorgement of unauthorized compensation, negotiated resolutions that address both the compensation issue and any broader concerns about the business relationship, and in appropriate circumstances, litigation or arbitration asserting claims for breach of fiduciary duty, breach of the operating agreement, or conversion of business funds.
Emergency relief — injunctive relief to stop further unauthorized payments — may also be considered where there is evidence of ongoing misappropriation. The availability of any particular remedy depends on the specific facts, the governing documents, and the applicable law.
Business owners who believe their partner is taking unauthorized compensation should consult with a business attorney promptly to evaluate the situation and understand what options may be available. For related topics, see our pages on operating agreements and shareholder agreements.
Business owners who believe their partner is taking unauthorized compensation are welcome to schedule a consultation with Russo Law LLC promptly to evaluate the situation and understand what options may be available.
Disclaimer
The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. This corporate lawyer blog post is for informational purposes only and does not constitute legal advice. It is not an offer for Russo Law LLC to represent any party, nor does it create an attorney-client relationship. No action or inaction should be taken based on the information provided without seeking professional legal counsel. This post is intended for businesses in New York and New Jersey. It may not reflect laws in other jurisdictions.
Do not send confidential or sensitive information through this website or in response to this blog post. Unsolicited information does not create an attorney-client relationship and should not be treated as privileged or confidential.